The Depository Trust and Clearing Corporation (DTCC) facilitates post-trade processing for over 98% of all credit derivatives worldwide (over $11 trillion). Last week, they announced (together with IBM) that DTCC is moving their credit derivatives Trade Information Warehouse (TIW) service off their legacy relational database and online transaction processing technologies and onto a distributed ledger, based on blockchain technology. That is a big deal for blockchain.
Thus, the announcement by The Depository Trust & Clearing Corporation (DTCC) to move its global credit derivatives information warehouse, TIW, onto distributed ledger technology marks a significant milestone in blockchain technology’s coming of age. DTCC is organized into twelve different subsidiaries, including DTCC Deriv/SERV which provides asset servicing and settlement services for about 98% of all credit derivatives2 traded globally. The average value of global credit derivatives trades held in the DTCC platform is nearly $12 trillion, almost 1,000 times the value of all existing cryptocurrencies combined.3 This represents a major part of the entire global economy. As you can imagine, DTCC has an enormous responsibility to ensure the integrity and availability of this system.
A Phased Approach
Deriv/SERV’s system for providing these credit derivatives post-trade services is called the Trade Information Warehouse (TIW), which currently resides on a mainframe. Last year, DTCC conducted an RFP process to assess using distributed ledger technology for these services. DTCC determined that the approach will provide significant cost savings over their current systems, while maintaining availability and security, and streamlining transaction processing. Development is expected to take about 12 months, with phase one targeted to go live in the first half of 2018. In phase one, DTCC will run the distributed ledger version of the services and database in parallel with the existing mainframe version, processing and storing the trades on both platforms. That phase may take six months, potentially longer, until they achieve very high confidence that the system is robust and working as it should. At that point, DTCC will decommission the legacy TIW platform and progress to phase two, which includes participant adoption of nodes on the distributed ledger network. The base blockchain capabilities powering the new TIW platform will then become part of the Hyperledger Project.
Figure 1 – Phased Transition to Blockchain-Only Approach – (Click on image to view it larger.)
Market Participants and Solution Providers Involved
Of course, DTCC is not doing this in isolation—a number of credit derivatives market participants have and will continue to provide their input and guidance, including Barclays, Citi, Credit Suisse, Deutsche Bank, J.P. Morgan, UBS and Wells Fargo; as well as market infrastructure providers IHS Markit and Intercontinental Exchange. IBM is managing and leading the program, and also providing integration services, distributed ledger expertise, and run support. Axoni is providing DLT infrastructure and smart contract applications. R3 is providing advisory services.
Decentralized Data, Centralized Governance
During our call with DTCC and IBM, I asked about decentralization and DTCC’s role. DTCC confirmed that although the ledger is distributed, DTCC will continue to play the role of central authority, which has several benefits. They can ensure well-defined processes for code deployment, and fully defined access controls and permissioning. This central governance is critical not only for the confidence of market participants, but also the regulatory community.
When I asked what key benefits they expect, DTCC said that in the first phase they expect to see a reduction in operating costs and greater processing efficiencies for themselves and their customers. In fact, they think customers may receive the greater benefit. After phase one, there may be additional functionality and efficiencies added. They also said, once confidence has been built up in robustness of this technology, they expect to use it in other parts of their business, including the movement of funds and other securities. This technology really could become the backbone of the global financial economy.
In short, I believe this is a big milestone for blockchain and distributed ledger technology. It will be even bigger once it is up and running and has proven itself.
1 There are actually over 500 different cryptocurrencies as of this writing. The second largest (in terms of market capitalization) is Ethereum, which supports smart contracts and various other decentralized applications. The third largest cryptocurrency is Ripple, a.k.a. Ripple Transaction Protocol (RTXP), which is being implemented by various banks and payment networks including Santander, UBS, and UniCredit. However, Bitcoin dominates, accounting for over 85% of the value of all cryptocurrency as of this writing. The current market cap of cryptocurrencies can be found here. -- Return to article text above
2 This includes credit default swaps, which played a role in exacerbating the financial crisis of 2008, but nevertheless can provide legitimate value by spreading default risks. In 2010, DTCC started giving regulators greater access to its credit derivatives database in an effort to increase transparency and better regulation. -- Return to article text above 3 As of this writing, Bitcoin’s total market value was around $13B, and all cryptocurrencies combined around $15B. -- Return to article text above
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